Understanding the ATO crackdown on the R&D Tax Incentive
What is the R&D Tax Incentive?
The R&D Tax Incentive is the single biggest Government program to support Australian businesses especially startups. It was introduced to provide a significant benefit to companies undertaking eligible research and development activities so that they could offset some of the costs of undertaking these activities.
According to the ATO, the R&D Tax Incentive is intended to benefit the economy by encouraging businesses to engage in research and development activities that may not have been otherwise conducted. It does not however, mean that every project is eligible for the R&D concession with Deputy ATO Commissioner Rebecca Saint recently commenting that “Just because a project is large, expensive or risky does not mean it necessarily qualifies as R&D for the purposes of the tax incentive".
So, why has the ATO started cracking down on R&D claims?
Recently, the ATO has been taking a much stronger stance against what it considers incorrect claims for the R&D Tax Incentive. It has taken steps to issue tax alerts in relation to activities being undertaken in the software and construction industries. As we operate in a digital world, software has been increasingly crucial in research and development.
Since the end of 2018, there have been some high-profile cases of companies claiming the R&D Tax Incentive for some of their costs and being forced to pay back money incorrectly claimed in addition to having to pay substantial tax penalties. The case involving the Commonwealth Bank of Australia is being viewed as a test case in which a settlement was finally reached this month in respect of claims in excess of $100 million as part of an overhaul of the bank's technology.
The confidential settlement illustrated that businesses cannot automatically expect to claim the R&D Tax Incentive for digital transformation and software development costs. Similarly, Airtasker, an online marketplace for outsourcing everyday tasks has also recently run into problems and has had to repay significant sums of money.
The above two cases illustrate the ATO’s desire to run high profile cases as a way of changing behavior when they perceive that an industry practice is not in line with their view. As part of this stance, the ATO is taking a more critical approach when assessing a business’ eligibility for R&D claims upfront and through its guidance. As part of this process the ATO has now begun to audit and reject claims paid out in previous years to businesses who are now under pressure to repay these grants.
What should I do?
Taxpayers need to clearly define and track R&D activities to ensure that they qualify for the R&D concession for the current year claims. If claims have been made in prior years, taxpayers may wish to review those claims to ensure that they are still comfortable with the claims considering the ATO’s increased audit activity.
Should you require further information to the above or have any questions about how this may impact your business, please do not hesitate to contact your engagement partner on 02 9283 166.
Article by David Prichard